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THE  IMPROPRIETY  OF  TAXING 
RETURNS  TO  LIFE  INSUR¬ 
ANCE  POLICY-HOLDERS 


BY 

ROBERT  LYNN  COX 

General  Counsel  and  Manager  Association  of  Life  Insurance  Presidents 


An  address  delivered  at  the  Twenty-sixth  Annual  Banquet 

of  the 

BOSTON  LIFE  UNDERWRITERS’  ASSOCIATION 
at  Boston,  Mass.,  February  16,  1909 


THE  IMPROPRIETY  OF  TAXING  RETURNS  TO  LIFE 
INSURANCE  POLICY-HOLDERS 

By  Robert  Lynn  Cox 

General  Counsel  and  Manager  Association  of  Life  Insurance 

Presidents 

AN  ADDRESS  DELIVERED  AT  THE  TWENTY-SIXTH  ANNUAL  BANQUET  OF 
THE  BOSTON  LIFE  UNDERWRITERS’  ASSOCIATION  AT 
BOSTON,  MASS.,  FEBRUARY  16,  1909 


Whatever  may  be  said  in  favor  of  having  the  general  business 
of  this  country  conducted  by  persons  instead  of  corporations,  as 
those  who  contend  for  a  return  to  the  methods  of  our  forefathers 
sometimes  advocate,  the  argument  falls  short  of  being  applicable  to 
life  insurance  companies.  Their  business  can  be  conducted  by  cor¬ 
porations  only. 

A  life  insurance  company  to  perform  the  function  for  which  it 
contracts  with  every  policy-holder  must  outlive  all  of  its  policy¬ 
holders.  Its  life  must  not  be  contingent  upon  any  human  life  or 
group  of  human  lives,  for  ultimately  they  must  end.  Being  a  corpo¬ 
ration  it  may  not  possess  a  soul,  but  in  a  business  sense  it  must  be 
immortal.  It  must  be  made  not  only  legally  immortal,  but  it  must  be 
managed  in  a  way  to  make  certain  that  it  will  not  fall  a  victim  to  any 
of  the  diseases  which  lead  to  corporate  death. 

The  insuring  public  wants  to  know  that  the  life  insurance  com¬ 
pany  with  which  it  contracts  not  only  can  live  but  that  it  will  live 
indefinitely.  Life  insurance  contracts  cannot  be  performed  by  corpo¬ 
rations  in  process  of  dissolution.  Bitter  experience  has  taught  us 
this. 

In  order  to  make  certain  of  its  own  life,  a  life  insurance  corpo¬ 
ration  should  grow  and  expand.  The  very  law  of  its  being  is  the 
law  of  average,  and  this  cannot  be  brought  into  play  except  by 
achieving  a  fair  size  and  covering  a  considerable  area  of  territory. 


2 


Up  to  that  point  its  business  is  speculative  and  its  existence  pre¬ 
carious. 

The  needs  of  the  business  and  its  relation  to  the  nation  were 
never  stated  in  better  form  than  by  Judge  Bradley  of  the  United 
States  Supreme  Court  when  he  said :  “The  business  of  insurance  par¬ 
ticularly  can  only  be  carried  on  with  entire  safety  by  scattering  tbe 
risks  over  large  areas  of  territory  so  as  to  secure  the  benefits  of  tbe 
most  extended  average.  The  needs  of  the  country  require  that  cor¬ 
porations — at  least  those  of  a  commercial  or  financial  character — 
should  be  able  to  transact  business  in  different  States.”  (Doyle  vs. 
Continental  Insurance  Company,  94  U.  S.  535.) 

But  unfortunately  insurance  corporations  were  not  within  the 
purview  of  the  framers  of  our  Federal  Constitution,  and  failed  to 
obtain  the  interstate  rights  so  carefully  secured  to  the  individual 
citizen  by  that  compact.  Therefore,  you  and  I  as  individuals  are 
guaranteed  the  right  to  do  what  you  and  I  as  a  corporation  may  not 
do.  As  individuals  we  would  have  the  right  to  transact  insurance 
business  in  any  State  of  the  nation,  if  the  nature  of  the  business 
made  it  practicable  for  us  to  do  so.  But  as  a  corporation  we  may 
not  enter  States  other  than  that  in  which  we  are  domiciled  except 
under  whatever  terms  and  conditions  such  foreign  States  may  choose 
to  impose.  This  right  on  the  part  of  foreign  States  to  set  up  bar¬ 
riers  against  the  entry  of  insurance  corporations  has  led  to  the  im¬ 
position  of  many  onerous  conditions,  not  the  least  among  which  is 
excessively  heavy  taxation.  To  a  consideration  of  this  subject  I 
am  assigned  upon  your  programme  to-night. 

Let  me  state  at  the  outset  that  I  shall  not  attempt  to  discuss 
it  at  length  nor  shall  I  speak  of  taxation  by  the  several  States  of 
their  domestic  life  insurance  companies.  What  I  shall  say  will  be 
solely  from  the  standpoint  of  foreign  corporations,  and,  of  course, 
all  of  the  large  life  insurance  companies  are  foreign  to  most  of  the 
States  in  which  they  do  business. 

By  approximate  uniformity  of  statutes,  the  tax  imposed  upon 
foreign  life  insurance  companies  by  the  several  States  and  Territories 
is  measured  by  premium  receipts,  either  gross  or  after  deduction  of 
various  items  therefrom.  There  is  but  one  exception  to  the  rule  and 
that  is  the  exception  afforded  by  the  State  of  Massachusetts.  Its 
tax  is  based  upon  reserves.  I  see  no  reason  to  criticise  the  use  of 
premium  receipts  as  the  basis  for  measuring  whatever  tax  the  State 


3 


may  deem  it  equitable  to  impose  upon  foreign  life  insurance  com¬ 
panies,  and  since  we  have  practical  uniformity  in  this  respect  I  would 
like  to  see  Massachusetts  follow  the  example  of  the  only  Chinaman 
who  lived  in  a  village  in  one  of  the  Western  States  and  who  on 
leaving  it  was  said  to  have  “moved  to  make  it  unanimous.” 

Legislators  have,  I  think,  rather  confused  themselves  by  assum¬ 
ing  that  the  tax  imposed  upon  foreign  insurance  companies  is  a  tax 
upon  property  simply  because  the  language  of  the  various  statutes 
professed  to  say  that  the  tax  was  imposed  upon  premium  receipts. 
In  every  instance  where  the  question  has  come  before  courts  for 
their  determinations,  they  have  held  that  no  matter  what  the  words 
of  the  statute,  the  tax  imposed  on  foreign  insurance  companies  was 
merely  a  franchise  tax  and  that  the  nominal  imposition  of  it  upon 
premium  receipts  was  simply  the  use  of  those  receipts  as  a  measure 
of  the  tax. 

It  therefore  seems  to  follow  that  being  a  franchise  tax  and  not 
a  property  tax  any  convenient  method  of  measuring  it  might  be 
adopted.  I  cannot  see  why  the  amount  of  the  net  premium  receipts 
within  a  State  is  not  as  fair  a  measure  as  any  other. 

Of  course  I  would  not  dare  to  stand  in  this  presence  and 
criticise  severely  any  law  of  the  State  of  Massachusetts,  for  I  recog¬ 
nize  as  clearly  as  you  must  that  this  State  is  and  always  has  been 
a  leader  in  the  matter  of  fair  and  intelligent  supervision  and  regula¬ 
tion  of  the  life  insurance  business.  Nor  would  I  care  to  take  the 
position  of  the  man  who  said  that  you  “can  always  tell  a  man  from 
Boston,  but  you  cannot  tell  him  much.”  I  say  merely  that  Massa¬ 
chusetts  stands  alone  in  its  method  of  taxing  life  insurance,  and  that 
in  the  interests  of  uniformity  I  would  bring  Massachusetts  over  to 
the  position  taken  by  some  fifty  other  taxing  jurisdictions  rather  than 
bring  the  fifty  over  to  the  position  taken  by  Massachusetts.  Strange 
as  it  may  seen,  I  should  regard  it  as  being  easier  to  do  so. 

I  would  have  you  understand  that  I  complain  of  the  franchise 
tax  imposed  by  the  States  upon  foreign  life  insurance  companies 
largely  because  of  the  widely  differing  rates  of  the  several  States  and 
the  enormous  total  of  the  tax.  ^ 

As  you  have  been  told  repeatedly,  the  life  insurance  companies 
of  this  country  contribute  annually  toward  the  expenses  of  the  several 
State  governments  in  which  they  do  business  an  amount  aggregating 
about  $11,000,000.  In  some  States  the  tax  constitutes  the  largest 


4 


single  item  of  the  resources  of  the  State.  From  the  standpoint  of  the 
companies  the  item  amounts  to  almost  as  much  as  the  entire  salary 
account  of  their  home  offices. 

In  view  of  the  fact  that  life  insurance  consists  merely  of  a  dis¬ 
tribution  among  the  many  of  the  financial  loss  caused  by  the  death 
of  the  few,  there  would  seem  to  be  many  reasons  why  it  should  not  be 
taxed  at  all.  As  was  said  by  Charles  Sumner,  many  years  ago,  life 
insurance  is  itself  a  tax  and  is  none  the  less  so  because  it  is  self- 
imposed.  It  is  not  a  business  involving  the  creation  of  wealth  with 
possible  profit  to  those  who  supply  the  capital,  but  is  merely  a  method 
of  saving  the  helpless  and  dependent  from  possible  want  and  penury. 

But  it  must  be  admitted  that  the  taxes  imposed  upon  life  insur¬ 
ance  companies  are  very  widely  distributed  among  the  people  of  the 
country,  because  of  the  number  of  policy-holders,  and  that  perchance 
the  bearing  of  this  burden  to  a  reasonable  degree  is  necessary  and 
as  equitable  as  it  would  be  to  carry  it  in  some  other  form.  Further¬ 
more,  it  is  idle  to  protest  when  States  have  come  to  rely  so  largely 
upon  life  insurance  policy-holders  for  the  support  of  State  govern¬ 
ments.  It  is  doubtless  more  practicable  for  us  to  discuss  a  method 
of  improvement  and  a  measure  of  partial  relief  that  lies  within  the 
bounds  of  accomplishment. 

Belief  in  this  policy  has  led  the  Joint  Committee  representing 
the  three  associations  of  life  insurance  companies  of  the  United 
States  and  Canada  to  recommend  that  States  which  have  hitherto 
taken  from  policy-holders  more  than  their  fair  share  of  tax  money 
shall  reduce  their  toll  to  at  least  the  average  rate  taken  by  all  States. 
The  method  they  suggest  brings  into  play  an  argument,  the  potency 
of  which  is  impressive.  They  ask  that  we  be  permitted  to  deduct 
from  our  gross  premium  receipts  of  the  year  the  returns  we  have 
made  to  citizens  of  the  State  during  the  year  under  our  policy  con¬ 
tracts.  In  other  words,  they  ask  for  us  the  privilege  of  deducting 
from  our  gross  receipts  death  losses  and  other  payments  made  to 
policy-holders  in  order  that  the  rate  of  taxation  shall  be  applied  to 
the  remaining  net  receipts. 

There  are  many  reasons  for  asking  for  this  privilege  aside  from 
the  reasons  which  lead  us  to  believe  that  taxation  should  be  reduced. 
In  the  first  place  the  States,  without  exception,  are  committed  to  the 
policy  that  the  mere  transaction  of  life  insurance  in  its  simplest  form 
should  not  be  taxed  at  all.  No  State  imposes  a  franchise  tax  upon 


5 

the  fraternal  and  assessment  life  insurance  corporations  whose  busi¬ 
ness  consists  merely  in  collecting  and  distributing  each  year  money 
enough  to  meet  current  death  losses  and  the  expenses  of  conducting 
the  business. 

Though  all  States  recognized  the  unwisdom  of  taxing  the  insur¬ 
ance  contract  or  transaction  itself,  they  were  led  to  do  so  by  a  desire 
to  reach  the  large  accumulations  of  funds  necessarily  incident  to  pro¬ 
viding  life  insurance  on  the  level  premium  plan.  That  these  accumu¬ 
lations  were  represented  by  securities  which  were  already  taxed, 
was  a  fact  not  generally  known.  Furthermore,  the  taxation  of  these 
companies  seemed  to  be  encouraged  by  the  belief  that  such  com¬ 
panies  were  temporarily,  at  least,  depleting  the  taxable  wealth  of 
the  State  from  which  premiums  were  being  collected.  In  fact  the 
same  argument  is  being  used  to-day  not  only  in  justification  of  taxa¬ 
tion,  but  as  affording  a  reason  why  foreign  life  insurance  companies 
should  be  required  by  statute  to  invest  their  reserve  funds  or  a 
considerable  portion  of  them  within  the  State. 

Without  stopping  here  to  point  out  some  of  the  fallacies  of  this 
line  of  reasoning,  nor  the  error  of  fact  as  to  where  such  reserves 
are  invested  now,  let  me  suggest  that  whatever  may  be  said  in  favor 
of  taxing  the  portion  of  the  premiums  which  the  law  says  must  be 
set  aside  and  held  as  a  reserve  fund,  there  is  no  reason  why  the 
portion  of  premium  receipts  which  is  returned  to  policy-holders  at 
once  should  be  subjected  to  taxation  or  should  be  included  within  the 
measure  used  to  determine  the  amount  of  the  tax.  As  to  this  portion, 
there  is  and  can  be  no  distinction  between  it  and  the  funds  collected 
and  immediately  distributed  by  fraternal  insurance  companies.  This 
portion  of  the  transaction  at  least  constitutes  in  effect  nothing  but  a 
transaction  between  citizens  of  the  State. 

In  accordance  with  the  basic  principles  of  life  insurance  the 
many  policy-holders  who  continue  to  live,  pay  to  the  representatives 
of  the  few  who  die  the  indemnity  furnished  by  the  insurance  contract. 
As  this  transaction  appears  from  the  standpoint  of  the  State  we 
note  first  that  there  has  been  no  withdrawal  from  the  State  of  any 
of  its  taxable  wealth.  No  profits  have  resulted  to  any  one,  but,  on 
the  contrary,  there  has  been  merely  a  wide  distribution  of  an  indi-, 
vidual  loss.  From  the  economic  standpoint  the  State  is  better  off 
because  of  this  distribution  of  loss,  for  in  cases  where  it  is  lacking 
there  is  danger  that  the  State  itself  may  have  to  assume  the  burden 


6 


of  caring  for  those  who  are  left  without  means  of  support  or  ability 
to  earn  a  living.  For  the  State  to  burden  the  transaction  with  a  tax 
is  to  discourage  that  which  its  own  interests  require  it  to  give 
encouragement. 

Should  any  one  say  that  the  method  we  favor  might  in  some 
cases  permit  a  life  insurance  company  to  escape  taxation  altogether  I 
would  reply  that  this  can  only  occur  if  death  losses  and  fulfilment  of 
other  policy  contract  obligations  require  the  company  to  pay  into 
the  State  within  a  given  year  more  money  than  it  is  withdrawing 
from  it  as  premium  receipts.  And  I  would  ask  why  should  not  a 
company  in  this  situation  be  exempted  from  taxation.  I  am  sure 
that  most  States  would  grant  exemption  under  such  conditions  very 
willingly.  It  is  such  a  “balance  of  trade”  that  not  only  individual 
States  but  nations  are  trying  to  bring  about.  If  it  be  true  that  the 
withdrawal  and  retention  of  the  wealth  of  a  State  constitutes  a 
menace  to  its  welfare,  it  must  be  equally  true  that  the  extent  of  the 
menace  is  measured  by  net  balances  only.  And  if  a  balance  against 
the  State  is  a  matter  of  grave  concern,  why  should  not  a  balance  in 
favor  of  the  State  be  a  cause  for  congratulation  and  meet  with  an 
appropriate  reward? 


Gaylord  Bros. 
Makers 

Syracuse,  N.  V. 
PAT.  JAN  21,  1908 


